Recently, Matt Yglesias flagged a disappointing passage from an Ezra Klein interview with Sen. Tom Coburn. Though I’ve disagreed with Sen. Coburn on a number of issues, including his Medicare reform proposal, I’ve been impressed by his work on tax expenditures and the Ryan-Coburn coverage expansion proposal, among many other initiatives. (Back in 2009, Donald H. Taylor Jr. offered a fair-minded summary of Ryan-Coburn, also known as the Patients’ Choice Act. HSI Network scored the proposal. We will return to this subject soon, as it bears on the health policy choices facing the Romney campaign.)

Yet on a crucial question regarding the supply of medical providers, Sen. Coburn takes a very, and surprisingly, wrongheaded view, as evidenced by his exchange with Ezra. Fortunately, Ezra was willing to press the senator on a central claim:

EK: You talk about needing more primary care, one possible option would be deregulating the licensing structure, letting nurse practitioners do more, letting Minute Clinics take a larger role, but that’s not something you hear from the left or the right.

TC: I think scope of practice and licensing is a state issue. The federal government, if you read the Constitution, has no role in that. But you never see the downside of less than well trained physicians in the care. It sounds really neat that I can use a nurse practitioner, but I don’t think nurse practitioners or physician’s assistants should practice alone without a physicians. No one ever studies the long-term consequences. Can you, with two years of training as a PA, compete with somebody with eight years of medical training?

EK: Haven’t there been studies looking at outcomes? I feel like I’ve read a number of them suggesting the care is fairly good.

TC: Sure, on sore throats and things like that? You bet! I’ll give you a good example. In our hospital back home, we don’t allow any primary care doctors to deliver babies. They can be trained to do it. But what we found is they waited too long to call one of us to come do the surgery that was required. And so, consequently, their judgment was impaired by their dollars. In other words, they thought if I delivered it, they would lose their fee. That sounds crass, but there’s greed in medicine. The point is we stopped having significant bad outcomes as soon as we instituted a policy that if you wanted to deliver babies at our hospital you needed to be able to deal with all the possible complications.

The question when you use physician assistants is, sure, there’s a group of patients for whom they’re probably better than physicians, as they’ll spend more time with them. But there’s a lot of stuff they’ve never seen and they miss and have no idea they missed it and the consequence shows up a week or a month or a year down the road. I’ll never forget a PA saw this kid with a fever, sent him home, and the kid had leukemia.

EK: But isn’t there a tension here where we say that if we expose consumers to more market pressures they can make better decisions and get rid of useless CT scans after brachytherapy but the market can’t take care of who should see a doctor and who should see a nurse practitioner?

TC: It can. I have friends who see naturalistic doctors. That’s their right. But we don’t want to mandate it. If Oklahoma wants to let a nurse practitioner do whatever they want, that’s up to Oklahoma. And let’s see how Oklahoma does. Let’s compare outcomes. But let’s use proven data.

Towards the end of the exchange, Sen. Coburn is being very evasive. The federal government, as Matt notes, has a great deal of leverage through Medicare and Medicaid. The doctors’ cartel, to use Matt’s evocative phrase, in contrast, has tremendous power at the state and federal level. There is a neat parallel to the power of teachers’ unions, which also exercise tremendous power at the state and local level. Mitt Romney has argued — rightly, in my view — that the U.S. Department of Education can and should use federal funding as leverage to encourage states to lift charter caps and to prevent them from prohibiting high-quality digital learning options.

As a staunch believer in competitive federalism, I am sympathetic to the idea that we want to allow states to go pursue different strategies. But Sen. Coburn is going beyond the argument from federalism, which, as we’ve seen, is problematic in this case, to suggest that it would be dangerous or unwise for Oklahoma to relax licensing restrictions. One wonders, however, if PAs have done more harm by undertreating patients than physicians have done by overtreating patients, due in large part to misaligned financial incentives.

We’ve discussed PAs and physicians in this space before in the context of the important work of Keith Chen and Judith Chevalier (here and here). While it might make sense to use physicians to diagnose complex problems, the evidence suggests that the main difference between PAs and physicians is that many PAs realized that they were not likely to work long enough hours to amortize the higher up-front investment in becoming a physician.

This is a conclusion that physicians, like Sen. Coburn himself, are likely to resist. There is a powerful cognitive bias at work: having made the higher up-front investment, of course one is inclined to believe that it was worthwhile. But as a conservative who is skeptical of federal power, Sen. Coburn should recognize how the federal government has entrenched the power of the doctors’ cartel. Back in January, we discussed Robert Whitaker’s discussion of the history of the AMA:

[In the early decades of the twentieth century,] the AMA turned itself into a watchdog of the pharmaceutical industry and its products. By doing so, the organization was both providing a valuable service to the public and furthering its members’ financial interests, for its drug evaluations provided patients with a good reason to visit a doctor. A physician, armed with his book of useful drugs, could prescribe an appropriate one. And it was this knowledge, as opposed to any government-authorized prescribing power, that provided physicians with their value in the marketplace (in terms of providing access to medicines).

The selling of drugs in the United States began to change with the passage of the 1938 Food and Drug Cosmetics Act. The law required drug firms to prove to the Food and Drug Administration that their products were safe (they still did not have to prove that their drugs were helpful), and in its wake the FDA began decreeing that certain medicines could be purchased only with a doctor’s prescription. In 1951, Congress passed the Durham-Humphrey Amendment to the act, which decreed that most new drugs would be available by prescription only, and that prescriptions would be needed for refills, too.

Physicians now enjoyed a very privileged place in American society. They controlled the public’s access to antibiotics and other new medicines. In essence, they had become the retail vendors of these products, with pharmacists simply fulfilling their orders, and as vendors, they now had financial reason to tout the wonders of their products. The better the new drugs were perceived to be, the more inclined the public would be to come to their offices to obtain a prescription. “It would appear that a physician’s own market position is strongly influenced by his reputation for using the latest drug,” explained Fortune magazine.

The financial interests of the drug industry and physicians were lined up in a way they had never been before, and the AMA quickly adapted to this new reality. In 1952, it stopped publishing its yearly book on “useful drugs.”

Note that a federal intervention created a lucrative monopoly for physicians. This lucrative monopoly generated resources, some of which were devoted to political activism designed to defend and extend the monopoly. Given the outsized federal role in creating the doctors’ cartel, would it not be reasonable for the federal government to do something about challenging it?

In medicine, you get cost inflation in hospitals because there is no hierarchy between doctors, trustees, and administrators — they essentially have achieved “co-administration” of the hospital, which makes it very difficult for any one faction to impose losses on the others. Same in universities — the administrators, faculty, and trustees all have a certain degree of power, but basically no way to force the other to do anything (so again, you’ve got co-decision making). In both cases, I think you only really kill cost pressures when you solve the control problem. In medicine, you can either go all the way to fully marketized medicine, in which all the major actors are profit-making firms and doctors are employees. Or you can go to a capitation system combined with doctors’ cooperatives, which preserves doctors’ professional control of medicine. But either the doctors or the corporate form has to win.

As a partisan of business model innovation, my sense is that fully marketized medicine is more likely to achieve the most socially beneficial outcomes. Clayton Christensen has identified three lessons from the history of disruptive innovation that help illuminate why that might be the case:

Three key lessons from the history of disruptive innovation are particularly important in the disruption of health care. The first is that while the technological enablers almost always emerge form the laboratories of leading institutions in the industry, the business model innovations do not. Almost always these are forged by new entrants to the industry. Regulators must beware, therefore, of attempts by the leading institutions to outlaw business model innovation. Regulation should facilitate it. What is in the interest of society most often does not coincide with the self-perceived interests of the leading institutions. [Emphasis added]

This first point applies directly to the doctors’ cartel, which plays a prominent role in leading virtually all of the dominant medical providers, including large general hospitals.

The second key lesson is that disruption rarely happens piecemeal, where stand-alone disruptions are plugged into the existing value network of an industry. Rather, entirely new value networks arise, disrupting the old. Hence, disruptive business models such as value-adding process clinics, retail clinics, and facilitated networks must be married with disruptive innovations in insurance and reimbursement in order to reap the full impact in cost and accessibility. At the outset, knitting all these pieces together will require a much higher degree of integration than has been the norm in the health-care industry. Difficult though it will be, these providers need to disrupt themselves. Employers will need to play a more proactive role in orchestrating the emergence of this new value network, compared to the reactive posture they have taken in the past.

And these new value networks will presumably treat doctors as employees rather than as privileged stewards of the organization. Decisions regarding the deployment of human capital will be made with an eye towards value and efficiency, not protecting privileges established in highly centralized fashion. Sen. Coburn understands that the central virtue of the market is that it is a decentralized trial-and-error discovery process. But why wouldn’t this also apply to determining the kinds of credentials that are necessary to perform various functions within a value network?

Finally, we have seen a pervasive pattern in every industry that has been transformed through disruption. This same pattern characterizes what has happened to date with disruptive initiatives in health care. The energies, talent, and resources of the leading organizations in an established system always are absorbed in improving their best products, which are sold to address the most demanding applications in the industry. Why? Because the high end of most markets is where the most attractive profits are made, serving the most profitable customers. When a disruptive technological enabler emerges, the leaders in the industry disparage and discourage it because, with its orientation toward simplicity and accessibility, the disruption just isn’t capable of solving the complicated problems that define the world in which the leading experts work. [Emphasis added]

In a similar vein, doctors, the high-end providers, have been extremely hostile to the use of PAs and other medical professionals — like Sen. Coburn, they disparage and discourage these alternative approaches that aim to serve the low end of the market more effectively on the grounds that (to be slightly ungenerous) a physician assistant once failed to diagnose leukemia in a child with a fever. Drawing on the talents of medical professionals who chose not to make high up-front investments for a variety of reasons is a disruptive technology. We should cheer it on, especially those of us who believe in restraining and reducing public expenditures, increasing public sector efficiency, and who believe that the health sector can become a source of sustainable productivity growth if business model innovation is allowed to flourish. (Yuval Levin has made this point very well.)

I hope, and I wouldn’t be too surprised if, Sen. Coburn eventually changes his mind on this issue.